solvency and financial condition report · malpractice account. the company seeks to adopt clear...

AmTrust International Underwriters DAC

Solvency and Financial Condition Report

For the year ending 31 December 2016

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Contents

Summary ................................................................................................................................................ 3

Overview of the Business and Context of this report .......................................................................... 3 Systems of Governance ...................................................................................................................... 4 Risk Profile ........................................................................................................................................... 5 Valuation for solvency purposes.......................................................................................................... 6 Capital Management ........................................................................................................................... 7

A. Business and Performance .......................................................................................................... 9

A.1 Business .................................................................................................................................. 9 A.2 Underwriting Performance .................................................................................................... 13 A.3 Investment Performance ....................................................................................................... 16 A.4 Performance of other activities.............................................................................................. 16 A.5 Any other information ............................................................................................................ 16

B. System of Governance ................................................................................................................ 17

B.1 General information on the system of governance ............................................................... 17 B.2 Fit and Proper Requirements ................................................................................................ 21 B.3 Risk management system including the own risk solvency assessment .............................. 22 B.4 Internal control system .......................................................................................................... 25 B.5 Internal audit function ............................................................................................................ 26 B.6 Actuarial function ................................................................................................................... 26 B.7 Outsourcing ........................................................................................................................... 27 B.8 Any other information ............................................................................................................ 27

C. Risk Profile ................................................................................................................................... 28

C.1 Underwriting risk profile ......................................................................................................... 28 C.2 Market risk ............................................................................................................................. 28 C.3 Credit risk .............................................................................................................................. 29 C.4 Liquidity risk........................................................................................................................... 30 C.5 Operational risk ..................................................................................................................... 31 C.6 Other material risks ............................................................................................................... 32 C.7 Any other information ............................................................................................................ 33

D. Valuation for solvency purposes ............................................................................................... 34

D.1 Assets .................................................................................................................................... 35 D.2 Technical Provisions ............................................................................................................. 36 D.3 Other liabilities ....................................................................................................................... 39 D.4 Alternative methods for valuation .......................................................................................... 40 D.5 Any other information ............................................................................................................ 40

E. Capital Management .................................................................................................................... 41

E.1 Own funds ............................................................................................................................. 41 E.2 Solvency capital requirement and minimum capital requirement ......................................... 42 E.3 Use of duration-based equity risk sub-module in the calculation of Solvency Capital Requirement ...................................................................................................................................... 43 E.4 Difference between the standard formula and the internal model used ............................... 43 E.5 Non-compliance with the Minimum Capital Requirement and non-compliance with the Solvency Capital Requirement .......................................................................................................... 43 E.6 Any other information ............................................................................................................ 43

F. Appendix – QRTs ......................................................................................................................... 44

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Summary

Overview of the Business and Context of this report

Business model

AmTrust International Underwriters Designated Activity Company (“AIU” or “the Company”) is an Irish registered insurance company, which writes multiple lines of business across the EU, EEA and the USA. Its primary markets as at the end of December 2016 are shown in the chart below.

The Company’s primary underwriting activities are within the following classes of business:

European Liability;

USA Liability;

Medical Malpractice Liability;

Warranty; and

Specialty Risks.

The Company is a subsidiary of the AmTrust Financial Services Inc. group which is listed on the US NASDAQ exchange (ticker: AFSI). AFSI is a multinational property and casualty insurer specialising in coverage for small businesses.

Solvency II

As a regulated insurance company, the Company is subject to the regulatory rules and principles adopted by Ireland and the European Union, which came into effect on 1 January 2016. Solvency II is a regulatory regime which is designed to set an appropriate level of capital that appropriately reflects the specific risk profile of insurance companies within the regime.

As an insurance company, the biggest source of risk in its business model relates to the uncertainty around forecasting what the Company’s future claims might be for the insurance policies that it has underwritten. Some of these liabilities could be realised many years after the original policy incepted and the associated premium collected. Regulatory capital is designed to act as buffer, which is to be held within the Company’s assets and liabilities and provides a safety mechanism to protect policyholders should the Company incorrectly estimate its future liabilities or if unforeseen stressed events occur which impact the markets in which it operates.

This Solvency and Financial Condition Report (“SFCR”) is a Solvency II requirement, which is designed to give the Company’s external stakeholders (including policyholders) an insight into the solvency and financial condition of the Company. This is the first SFCR prepared by the Company. It is prepared on a solo entity basis and it covers the year ended 31 December 2016.

Material changes to the Company’s business model

There have been no material changes in 2016 to the way that the Company conducts business in the lines of business within which it operates. However, the following significant events have impacted the Company during the year or are expected to impact it in the future:

Italian Branch: The Company set up an Italian branch operation to better manage increased Italian business.

Brexit: AIU maintained a risk-based analysis of the impacts of the UK’s decision to leave the EU.

Outsourcing: The Company transitioned its support functions to an AmTrust Management Services Ireland Ltd.

Status change: In accordance with Irish Company Law, all financial services companies (which aren’t publicly quoted) were required to change their status from “Limited” to “Designated Activity Company” or “DAC” as a shortened version.

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Business performance

The Company’s 2016 projected written premium was slightly down on the prior year. However, when non-renewal business was considered the year-on-year comparison indicates a growth of approximately €25m primarily due to new business and organic growth in the Nordic region and organic growth of a number of the profitable surplus lines programmes.

The main classes of business contributing to the profitability and revenue growth of the Company were Casualty, Nordic business and the Medical Malpractice account.

The Company seeks to adopt clear risk appetites and underwriting disciplines in the lines of business in which it participates and employs experienced and professional underwriters that have a good track record of underwriting profitably throughout the insurance cycle.

Systems of Governance

The Company has developed a system of corporate governance to ensure that there is a clear process of decision making combined with accountability and transparency.

The Board bears the ultimate responsibility for setting and achieving the Company’s strategy and putting in place appropriate systems and infrastructures to manage the associated risk in its business model. In line with the established best practices within the Insurance market, the Company follows the “Three Lines of Defence” model of corporate governance.

2016 Total

€’000

Gross Written Premium 351,946 Gross Earned Premium 336,673 Gross Incurred Claims (280,939) Gross Operating Expenses (44,719) Gross Technical Result 11,015 Reinsurance Balance 10,082 Net technical result 21,097 Allocated Investment Income 15,994 Balance on Technical Account 37,091

First Line of Defence

Board of

Directors

CEO

Business Units Actuarial

1L of Defence

Day-to-day management and risk

control

2L of Defence

Risk policies | Methodologies &

oversight | Compliance oversight

3L of Defence

Independent assurance

Second Line of Defence Third Line of Defence

Risk &

Compliance

Committee

Risk

ManagementCompliance

Audit

Committee

Internal Audit

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The Company’s key committees are depicted above within the three lines of defence model. Committees have clear lines of authority and responsibilities which are documented in formal Terms of Reference (TORs). Responsibilities are broadly split between those that support decision making (first line) versus those that challenge and review the systems and controls that manage risk within the Company’s business model (second and third line).

Risk Profile

The Company calculates its required capital from a regulatory perspective by reference to certain risk categories that it is exposed to within its business model. The main risks to which the Company is exposed are:

Underwriting risk;

Market risk; and

Credit risk.

For each risk category, the Company has articulated how much risk it is willing and able to accept based on its strategic profile and capital position. The Company has put in place systems and controls to manage its risk profile within its risk appetite statements. The Company uses a suite of Key Risk Indicators (KRIs) to monitor its exposure to the various risks to which it is exposed and these are evaluated on a quarterly basis.

Underwriting Risk

The Company’s largest risk exposure is in respect of underwriting risk, which is broken down into two main components: premium risk and reserve risk. Premium risk is the risk that premiums are insufficient to cover the value of claims made; and reserve risk is the risk that on-going claims are settled at a higher value than previously expected. The majority of the Company’s material underwriting r isk exposure comes from the US Casualty business by virtue of the fact that it represented the largest class of business during 2016.

Market Risk

Market risk is the risk of loss of income or decrease in the value of assets caused by movements in the level and prices of financial instruments. Market risk includes factors such as equity values, property values, interest rates, foreign exchange and spread risk.

The Company’s material exposures to market risk are: interest rate risk and spread risk on its bond portfolio; foreign exchange risk on its currency exposures and equity risk on its strategic investments in subsidiaries.

Credit Risk

Credit risk is the potential loss arising principally from adverse changes in the financial condition of intermediaries who sell the Company’s policies, the issuers of fixed maturity securities and the financial condition of third party reinsurers.

The Company is subject to material risk exposures with respect to its reinsurers, banks and bond counterparties. The Company is exposed to credit risk in relation to material accounts with Reinsurance counterparties: Maiden Insurance Company Limited and AmTrust International Insurance Limited (AII).

Other risks

The Company is also exposed to the following other risks:

Liquidity risk;

Operational risk; and

Legal and regulatory risk.

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Valuation for solvency purposes

The Company’s assets and liabilities are valued differently when calculating its regulatory capital under Solvency II and when preparing its annual accounts for filing at the Companies Registration Office. The former applies the valuation rules from the Solvency II Directive, and the latter applies valuation rules under Irish Generally Accepted Accounting Principles (“Irish GAAP”). The Company also contributes to consolidated accounts prepared by the ultimate parent company, AFSI. These accounts are prepared using accounting standards in the US, referred to as US GAAP.

The valuation rules from the Solvency II Directive utilise International Financial Reporting Standards (“IFRS”) as a starting position with various changes applied to move to an economic balance sheet position. Irish GAAP is largely equivalent to the accounting principles applied under IFRS, although differences do exist. Further differences can also occur when comparing Solvency II and Irish GAAP valuation approaches against US GAAP.

Assets and Other liabilities

According to Article 75 of Directive 2009/138/EC an insurance entity shall value assets and liabilities as follows:

(a) Assets shall be valued at the amount for which they could be exchanged between

knowledgeable willing parties in an arm’s length transaction; and

(b) Liabilities shall be valued at the amount for which they could be transferred, or settled, between

knowledgeable willing parties in an arm’s length transaction.

When valuing liabilities under point (b), no adjustment to take account of the own credit standing of the insurance or reinsurance undertaking shall be made

The Company values its assets and liabilities in accordance with Irish GAAP with adjustments made where this is not consistent with the requirements of the Solvency II Directive. The key differences are described below and a full analysis of the valuation approaches used are included in Section D (Valuation for Solvency Purposes).

Holdings in related undertakings, including participations

The Company has investments in wholly owned subsidiaries which have been deemed to be strategic participations under the Solvency II guidelines. A strategic participation is defined as an equity investment which:

is materially less volatile for the following twelve months than the value of other equities in the

same period as a result of both the nature of the investment and the influence exercised by the

Company;

the nature is strategic, taking into account all relevant factors, including:

o the existence of a clear decisive strategy to continue holding the investment for a long

period;

o the consistency of the strategy referred to above with the main policies guiding or

limiting the actions of the undertaking;

o the ability to continue holding the participation;

o the existence of a durable link;

o the consistency of the strategy of the investment with that of the group.

As none of the subsidiaries is listed, they are valued on the adjusted equity method.

The adjusted equity method means using the excess of assets over liabilities using Solvency II valuation principles.

These valuation methods are a departure from the approach used under Irish GAAP and therefore an adjustment is made to arrive at the Solvency II balance sheet.

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Receivables and payables

Receivables and payables are valued at amortised cost, consistent with the approach under Irish GAAP, which is not considered to be materially different to the Solvency II valuation principal.

Receivables which are not yet due are reclassified and dealt with as part of the technical provisions, described below.

There are a number of other reclassifications made between the Irish GAAP balance sheet and the Solvency II balance sheet. These are purely descriptive in nature.

Technical Provisions (“TPs”)

Technical provisions (TPs) represent a valuation of the Company’s obligations towards policyholders. The value of technical provisions corresponds to the theoretical amount that the Company would have to pay if it were to transfer its insurance obligations immediately to another insurance company.

The following table shows a summary of the Company’s total Technical Provisions as of Q4 2016.

Line of Business Total Best Estimate Gross

Risk Margin Gross Technical Provisions

Recoverables from Reinsurance

Contacts

Total Technical Provisions Net of

Recoverables

€’000 €’000 €’000 €’000 €’000

Income Protection 3,218 0 3,218 (3,975) (757)

Fire and other damage

51,631 1,171 52,802 (44,084) 8,718

General Liability 338,059 7,747 345,806 (288,121) 57,685

Credit and suretyship

49,166 1,145 50,311 (41,785) 8,526

Assistance 2,015 47 2,062 (1,710) 352

Miscellaneous financial loss

124,417 1,526 125,943 (114,578) 11,365

Total 568,506 11,636 580,142 (494,252) 85,889

The Company’s GAAP reserving policy requires the calculation by the Actuarial function of ultimate loss ratios with no margins for prudence or optimism. An explicit margin is added based on the Reserving Committee recommendations. Solvency II Technical Provisions are evaluated on a best estimate cash-flow basis with items such as unearned premium reserves removed. To convert the Company’s Technical Provisions from a GAAP basis to a Solvency II basis, the following key adjustments are made:

Removal of any margins in the GAAP reserves (including the equalisation reserve).

Recognition of profit in the Unearned Premium Reserve.

Recognition of profits in business written prior to but incepting after, the valuation date.

Allowance for future premiums.

Allowance for “Events Not In Data” (ENID).

Allowance for expenses required to service the run-off of the Technical Provisions.

Allowance for non-recoverable reinsurance.

Allowance for the future cost of reinsurance in respect of written business.

Allowance for the impact of policies lapsing.

Allowance for future investment income (discounting).

Allowance for a risk margin.

These adjustments are explained in further detail in Section D (Valuation for Solvency Purposes).

Capital Management

The Company uses an external system, VEGA, provided by Milliman to calculate its Solvency Capital Requirement (“SCR”) and its Minimum Capital Requirements (“MCR”). The Company does not use any Undertaking Specific Parameters (“USPs”) allowed under Solvency II, nor does it use simplified calculations for any of the risk modules.

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Capital Requirements 31 Dec 2016 €’000-

SCR 92,167

MCR 23,042-

The Company’s SCR split by risk module as at 31 December 2016 is shown in the table below.

Solvency Capital Requirement €’000-

Heath NSLT underwriting risk 361

Non-Life underwriting risk 34,540

Market risk 42,870

Counterparty default risk 23,410

Undiversified Basic SCR 101,181

Diversification credit (26,070)

Basic SCR 75,112

Operational risk 17,055

Standard formula SCR 92,167

28%

35%

19%

18%

SCR Composition (post diversification)

Non-Life underwriting risk

Market risk

Counterparty default risk

Operational risk

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A. Business and Performance

A.1 Business

Name and legal form of undertaking

AmTrust International Underwriters Designated Activity Company (“AIU” or “the Company”) is a Company limited by shares (Company Number 169384).

The Company’s registered address is as follows: AmTrust International Underwriters DAC, 40 Westland Row, Dublin 2. D02 HW74

Supervisory authority

The Company is regulated by the Central Bank of Ireland (the “Central Bank”). The Central Bank was created on 1 February 1943. The Central Bank Reform Act 2010 (the “Act”) created the new single unitary body, the Central Bank, which replaced the previous related entities, the Central Bank and the Financial Services Authority of Ireland and the Financial Regulator. The Act commenced on 1 October 2010 the Central Bank’s primary objectives are set out therein.

The Central Bank’s registered address is as follows:

Central Bank of Ireland, New Wapping Street, North Wall Quay, Dublin 1

Tel +353 (0) 1 224 6000 Fax +353 (0) 1 671 5550 [email protected]

External auditor

The Company, together with the wider AmTrust Group, is audited by KPMG. KPMG’s Irish office is located at:

KPMG, 1 Harbourmaster Place, IFSC, Dublin 1 Tel +353 1 410 1888

Shareholders of qualifying holding in the undertaking

The Company is a wholly owned subsidiary of AmTrust Equity Solutions which is a Bermuda based company. The Company’s ultimate parent is AmTrust Financial Services Inc (AFSI) which is a Delaware registered US corporation.

AFSI underwrites and provides property and casualty insurance products in the United States and internationally to niche customer groups that it believes are generally underserved within the broader insurance market.

As a subsidiary of AFSI (NASDAQ Global Market: AFSI) the Company benefits from financial, operational and management support. AFSI is a multinational property and casualty insurer specialising in small to medium-sized businesses. With extensive underwriting experience and a prestigious “A” (Excellent) Financial Size “XIV” rating from A.M. Best, AFSI has earned a reputation as an innovative, technology driven provider of insurance products. Commitment to excellence is a common thread connecting each of the AmTrust companies.

AFSI’s business model focuses on achieving targeted returns and profit growth with the careful management of risk. The Global Group pursues these goals through geographic and product diversification, as well as an in-depth understanding of its insured exposure. The product mix includes, primarily: workers' compensation; extended warranty; and other commercial property/casualty insurance products, including title insurance and crop insurance. Workers' compensation and

http://www.irishstatutebook.ie/eli/2010/act/23/enacted/en/html

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property/casualty insurance policyholders in the United States are generally small and middle market businesses. Extended warranty customers are manufacturers, distributors and retailers of commercial and consumer products. AmTrust has also built a strong and growing distribution of extended warranty and specialty risk products, including liability and other property/casualty products in Europe.

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Position within the legal structure of the group

The following simplified group structure chart shows where the Company sits within the wider AFSI group.

Material lines of business and material geographical areas where the Company carries out business

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The principal activity of the Company is the underwriting of general insurance business in Ireland, EU/EEA and USA. The Company's core product lines are European Liability, US Liability, Medical Malpractice Liability, Warranty and Specialty Risks.

Material events

The following material events impacted the Company during the year:

Establishment of Italian Branch - In February 2016 the Company was authorised by the Central Bank under EU Freedom of Establishment rules to open a branch in Italy having operated previously for over five years on a Freedom of Service basis. The offices of the branch are located in Milan, Italy and are staffed by administrative, compliance, finance, claims, underwriting and management teams. The branch structure has provided the Company with greater control over the consideration and management of risks as well as the ability to react quickly to changing regulatory, legal and market conditions. The principle focus of the branch is in the general insurance areas of medical malpractice, liability, warranty and home assistance.

Brexit - On 23 June 2016, the United Kingdom voted to leave the European Union. The Company carried out a detailed risk analysis of the potential Brexit impacts over the course of 2016. Because of a change in Group strategy consequent upon the UK’s exit vote, The Company stands to materially profit from its location in Ireland and as the primary AmTrust EU-based insurance company.

AmTrust Management Services Ireland Ltd. - During 2016 the Company, having consulted with the Central Bank, successfully outsourced support services to AmTrust Management Services Ireland Limited (“AMSIL”). This process ensured the Company’s operations remained consistent with the wider AmTrust Group. Through focussing insurance activities in the Company and service support functions in AMSIL, both companies are able to operate to their key strengths. The Company can continue to concentrate on developing innovative, niche products to deliver to underserved markets and AMSIL focusses on providing excellent quality and speed of delivery to the Company’s customers as well as other stakeholders such as intermediaries and coverholders. This development ensures that the Company is well positioned to take advantage of the future direction of insurance distribution as it becomes more dependent on technological advances.

Name Change: The Company changed its name in accordance with the requirements of the Companies Act 2014 from AmTrust International Underwriters Limited to AmTrust International Underwriters Designated Activity Company (DAC). This necessitated a wide ranging communication process with all stakeholders and wholesale updating of marketing collaterals to give effect to this change. This process was completed within the deadline permitted under the legislation in 2016.

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A.2 Underwriting Performance

Material lines of business




Contacts


Recoverables

€’000 €’000 €’000 €’000 €’000



51,631 1,171 52,802 (44,084) 8,718



49,166 1,145 50,311 (41,785) 8,526

Assistance 2,015 47 2,062 (1,710) 352


124,417 1,526 125,943 (114,578) 11,365

Total 568,506 11,636 580,142 (494,252) 85,889

A.2.1.1 General liability

A.2.1.1.1 European Liability

The Company underwrites European liability accounts in Ireland, France, Spain, Germany and Italy of small and medium enterprises and related low to medium-hazard risks.

Business is underwritten on defined appetite and underwriting parameters on a programme or single account basis. The Company writes business in the relevant markets through associated group offices throughout Europe. All business programmes require final sign-off and approval by the Company’s Underwriting Committee (“UWC”).

Current business has experienced improving loss ratios for the last three years compared to prior years, with reduced costs in the last eighteen months in part due to moving claims-handling ‘in-house’ and reducing commissions where appropriate.

A.2.1.1.2 US Liability

The United States surplus lines liability segment of the Company business is primarily public and products liability with a number of contractors programmes.

This business line is presented to the Company primarily through AmTrust’s US offices. Some programmes underwritten in prior years are in run-off. The remaining renewable programmes have operated profitably during 2016 reflecting a positive outcome to the book review undertaken during 2015.

Actuarial review by U.S. actuarial team in conjunction with the European actuarial team is undertaken monthly. The business overall is reviewed on a quarterly basis through the Reserving Committee.

All business programmes require final sign off and approval by the UWC.

A.2.1.1.3 Medical Malpractice Liability

This product covers a combined package offering of medical malpractice, third party liability and employers liability for Italian and French hospitals.

The Company entered the Italian medical malpractice market in 2011 and the French medical malpractice market in 2012.

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Medical malpractice business is generated through key partners in France and Italy with local market expertise residing in the AmTrust Lyon office and The Company’s branch in Milan. The medical malpractice renewal window in both markets is predominately 1 January annually.

Claims handling is conducted by AmTrust with extensive medical malpractice claims experience retained in the AmTrust London, Lyon and Milan offices.

The medical malpractice loss-ratio currently runs in line with projections since entering both markets.


A.2.1.2 Miscellaneous financial loss

A.2.1.2.1 Specialty Risks

The specialty risks segment of the Company’s business relates to a number of product covers in a business segment in which the Company has operated for many years.

The key covers provided within this segment are primarily home assistance, commercial credit, auto assistance, plant and equipment, income protection, structural defects and heating pumps with the predominant markets being the Nordic and UK regions.

Given the remedial action taken on poor performing programmes in prior years the outlook for all lines of covers within Specialty Risks is positive for 2017 and beyond.

The values in place within this product segment range from circa several hundred euro for covers such as auto and home assistance to a several hundred-thousand euro for plant and machinery and structural defects.

The Company has adequate reinsurance cover in place with respect to the higher values ‘within segment’ product areas of plant and machinery and structural defects.


A.2.1.3 Property

A.2.1.3.1 Warranty

The key covers provided within this segment are mobile phones, auto warranty and consumer electronics with the predominant markets being the Nordic and UK regions.

Monthly mobile phone cover is the majority of this product line. The auto warranty segment is primarily from business generated in the UK. The consumer electronics product segment business is generated in both the Nordic and UK markets with cover being offered for televisions, computers and portable

tablets.

The UK and Nordic business is generated by the Stockholm and London offices both of which have extensive experience in this market segment.

The warranty business has performed consistently well over a number of years.


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A.2.1.4 Other

Material geographic areas

Performance in Ireland and the top five countries in which the Company operates is summarised in the table below.

2016 USA Sweden France UK Denmark Ireland

€’000 €’000 €’000 €’000 €’000 €’000

Gross premiums written 144,499 49,275 44,418 35,194 29,154 10,023 Reinsurers’ share 122,253 41,885 38,095 29,909 24,781 8,540 Net premiums written 22,246 7,390 6,323 5,285 4,373 1,483 Gross premiums earned 130,809 50,342 50,525 35,386 26,695 7,665 Reinsurers’ share 110,526 42,752 42,822 30,060 22,900 6,192 Net premiums earned 20,283 7,590 7,643 5,326 3,795 1,473 Gross claims incurred 73,768 39,966 37,442 25,741 25,883 4,662 Reinsurers’ share 62,703 33,863 31,826 21,879 22,001 3,963 Net claims incurred 11,065 6,103 5,616 3,862 3,882 699 Net operating expenses 4,561 771 641 292 233 1,038

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A.3 Investment Performance

The Company invests in corporate and government bonds, property and a number of subsidiaries and associates.

The management of the bond portfolio is outsourced to another company within the Group, which has a dedicated team of investment managers. A set of investment management guidelines has been drawn up, adherence to which is monitored by the Investment Committee and the Audit Committee. Income and expenses during the year are shown in the table below.

The property investment comprises the Company’s branch office building in Milan, Italy.

The Company has also provided an inter-company loan at commercial rates to another AmTrust entity.

The Company’s material subsidiaries are AmTrust Nordic AB, based in Sweden and its subsidiaries based in Sweden and Norway.

2016 Corporate and Government Bonds

Equities Loans and Receivables

€’000 €’000 €’000

Income from other investments 6,479 4 282

Unrealised (loss)/gain on investments 6,559 111 0

Investment management expenses (312) 0 0

Realised gain/(loss) on sale of investments 2,952 (82) 0

15,678 33 282

A.4 Performance of other activities

The Company did not undertake any other activities during the year.

A.5 Any other information

None noted.

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B. System of Governance

B.1 General information on the system of governance

The Board and System of Governance

The Board and its sub-committees are shown in the diagram below.

The Company follows the “Three Lines of Defence” model of corporate governance. In summary, the key differences between the lines of defence are as follows:

First Line of Defence – the primary risk taking and decision making activities take place here. It represents the bulk of the Company’s people, systems and controls that are integral to achieving the Company’s strategy.

Second Line of Defence - responsible for reviewing risks across the first line. No risk taking activities take place here. Key control functions such as Risk Management and Compliance reside in this category.

Third Line of Defence – the first and second lines together form the Company’s system of governance and internal control. The Third Line is independent of first and second lines, and its primary objective is to provide assurance on the operation of the Company’s governance and internal control systems. The Company has an independent Internal Audit function which resides in this category.

The Company’s Board is collectively responsible for the long-term success of the Company and for compliance with all laws and regulations. Its role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed. The principal focus of the Company’s Board is on the overall policies, strategic plans, performance, annual budget, investment budgets, larger capital expenditure proposals and the Company’s overall system of internal controls, governance and compliance. The Board develops and promotes its collective vision of the Company’s purpose, its culture, its values and the behaviour it wishes to promote in conducting its business.

CEO

AmTrust

International

Underwriters DAC

Board

Risk &

Compliance

Committee

Reserving

Committee

Investment

Committee

Underwriting

Committee

IT Governance

Committee

Audit

Committee

First Line of Defence Second Line of Defence Third Line of Defence

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The Board of Directors consists of seven members, including the Chairman of the Board as follows:

Board Member Board Balance Key Role

Chairman of The Board Independent Member and Chair of the Board

Independent Non-Executive Director (INED) Independent Member of the Board, Chair of the Audit Committee

Independent Non-Executive Director (INED) Independent Member of the Board, Chair of the Risk and

Compliance Committee

Independent Non-Executive Director (INED) Independent Member of the Board and Audit Committee

Non-Executive Director (NED) Group Role Member of the Board, Shareholder Representative

Non-Executive Director (NED) Group Role Member of the Board, Risk and Compliance

Committee and Shareholder Representative

Chief Executive Officer (CEO) Executive Day to day running of the Company

B.1.1.1 First Line Committees

B.1.1.1.1 Management Committees

B.1.1.1.1.1 Reserving Committee

Setting adequate reserves for policies underwritten represents the largest risk to an insurance company. The key purpose of the Reserving Committee is to ensure appropriate reserving processes are in place at the Company and that the level of reserves booked by the Company is reasonable. The key responsibilities of the Committee are to present, discuss and review of the appropriateness of assumptions of reserving performance and positions and make reports and recommendations to the Risk and Compliance Committee and senior management team.

The Company maintains an Actuarial function that projects an independent actuarial estimate of the reserves for each class of business. These are presented at the Reserving Committee to challenge management’s view of the reserves. The discussions and challenges around the reserve setting process are formally minuted.

The Reserving Committee consists of four members, who are the Chief Executive Officer (CEO); Chief Finance Officer (CFO); the Head of Underwriting (HoU) and a Non-Executive Director (NED). The Head of Risk and Compliance (HoRC), Head of Claims (HoC) and the Head of Actuarial Finance (HoAF) are attendees.

B.1.1.1.1.2 Underwriting Committee

The key purpose of the Committee is to monitor and manage performance, against the business plan and the associated insurance risk, including reinsurance composition. The key responsibilities of the Committee are to review the Company’s underwriting policies, guidelines, authorities, processes and procedures to meet its underwriting risk appetite; advise and monitor on insurance and reinsurance risk profile and exposures; review pricing adequacy and underwriting performance; and assess the Company’s underwriting opportunities within its chosen markets.

The Underwriting Committee consists of three members, including the Chief Executive Officer (CEO), the Head of Underwriting (HoU) and the Head of Risk and Compliance (HoRC).

B.1.1.1.1.3 IT Governance Committee

The key responsibilities and duties of the Committee is to implement and maintain an effective IT governance framework, oversee the development of the Company’s IT Systems, assess current IT system requirements and developments and forward proposals for the development of new systems or amendments to current systems.

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The Committee consists of three members, including the Chief Executive Officer (CEO); Chief Finance Officer (CFO) and the IT, Operational Systems and Development Manager.

B.1.1.1.1.4 Investment Management Committee

The key responsibilities and duties of the Committee are to monitor investment risk and associated credit and liquidity risk.

The Committee consists of two members including the Chief Finance Officer (CFO) and the Group’s Chief Investment Officer who has been approved by the Central Bank as a PCF-19, Head of Investment.

B.1.1.2 Second Line Committees

B.1.1.2.1 The Risk and Compliance Committee

The key purpose of the Committee is to oversee all aspects of the Company’s risk management and to support the Board in the implementation of a robust risk management framework, including identifying, monitoring and managing risks to assist the Board in the delivery of the strategic objectives and business plans. The key responsibilities and duties of the Committee are to advise the Board on the risk strategy, including risk appetite and tolerance levels, for ensuring that the risk management framework is appropriate and adequately resourced.

The Committee consists of four members, including the Chairman of the Board, Chief Executive Officer (CEO), an independent Non-Executive Director and a Non-Executive Director. The Head of Risk and Compliance is an attendee.

B.1.1.3 Third Line Committee

B.1.1.3.1 Audit Committee

The key purpose of the Committee is to provides independent assurance on the design and effectiveness of the overall system of internal control, including risk management and compliance.

The key responsibilities of the Committee are to monitor the financial reporting process; to inform the Board of the outcome of the statutory audit; to make a recommendation for the appointment of the audit firm; and to review the appropriateness of the Company’s Internal Audit function, internal data, systems, controls, and risk management as related to financial reporting.

The Committee consists of four independent Non-Executive Directors of the Board.

Changes in the System of Governance

In recognition of the growth and development of the Company, as well as in response to a higher level of regulatory oversight, a number of governance improvements were made during 2016. These included the following, which have all been reflected in the commentary above:

Appointment of a new Head of Risk and Compliance.

Appointment of a new Head of Underwriting.

Appointment of a Business and Operations Manager.

Appointment of a new Independent Non-Executive Director, with significant experience;

Creation of one new Committee within the Company’s Governance Structure:

o IT Governance Committee;

Revised Committee membership which reflected the above senior management and Board

changes.

These changes significantly strengthened the Company’s oversight and management framework resulting in further improvements to the management of risk.

Remuneration Policy

The Company’s Remuneration Policy describes the overarching principles and framework for the employees that fall within its scope and operate on its behalf. In that regard the Remuneration Policy follows the requirements contained within the Central Bank’s Corporate Requirements for Insurance Undertakings 2015 (the “Corporate Governance Requirements”). The Company’s Board is responsible for the effective, prudent and ethical oversight of the insurance undertaking and inter alia is responsible for setting and overseeing a remuneration framework that is in line with the risk strategies of the

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Company1. The Company’s Board has decided in accordance with the provisions of the Corporate Governance Requirements not to establish a formal Remuneration Committee.

The Remuneration Policy is designed to support the appropriate management of employee compensation and act as reference for the Board and Management when making decisions on pay. The Remuneration Policy and the associated remuneration plans and programmes will be regularly reviewed to ensure that they remain fit for purpose in terms of business strategy and applicable regulations. The policy is designed to:

help to attract, retain and motivate competent, experienced and skilled personnel;

be competitive within the general insurance market;

encourage and support a high performance culture;

be consistent, fair and transparent;

achieve a balance between short and long-term reward/fixed and variable pay to promote a long term focus;

promote sound and effective risk management2 to prevent excessive risk taking3 that exceeds the risk appetite / tolerance limits;

ensure that incentives are aligned, particularly in relation to decision-making and risk-taking behaviour, with the Company’s overall business and risk management strategies and objectives;

avoid rewarding failure;

consider the overall assessment of an individual’s performance, not just the performance of the Company or a particular business unit; and

particularly in the case of senior managers, be aligned to the Shareholders’ interests.

The Company aims for the following in respect of its remuneration practices:

ensure consistent, equitable and transparent remuneration policies and practices;

set base salary at the median level in the market;

where appropriate reward upper quartile performance with upper quartile pay;

with regard to variable pay: o introduce/maintain appropriate short and long term incentive schemes appropriate to

the business strategy and risk management principles and objectives; and o align variable pay to the Company’s Return on Equity (“ROE”) goal; o where, appropriate the Line of Business ROE target(s); and o individual performance (including the adherence to its Corporate Conduct principles).

ensure separate/specific arrangements for the various categories of staff; i.e. o those personnel whose professional activities have a material impact on the risk profile

of the business (Board Members, key function holders, Underwriters); o those who may have a conflict of interest (e.g. Risk Management, Compliance,

Actuarial, Claims, UW Support); o those who are unable to materially/directly affect the profitability of the organisation but

who are crucial to its effective operation (e.g. Finance, IT, HR, etc.).

defer the payment of a portion of the variable remuneration - in particular for Executive and Senior Professional/income generating personnel - in whatever vehicle(s) it deems appropriate (Long Term Incentive Plans, Restricted Stock Units, etc.) in line with its corporate strategy;

provide a competitive package of benefits;

benchmark total remuneration (cash and benefits) annually with relevant industry compensation surveys and be sensitive to pay and employment conditions elsewhere in the group and the market;

review its remuneration policy and practices annually, update them as required and ensure these are published/available to all personnel.

1 Corporate Governance Requirements for Insurance Undertakings 2015, section 13.1 e).

2 Corporate Governance Requirements for Insurance Undertakings 2015, section 6.3.

3 Corporate Governance Requirements for Insurance Undertakings 2015, section 15.7.

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In general, performance related bonuses are purely discretionary. This gives the Company a high degree of flexibility in rewarding the employee based on sustained performance.

Underwriters’ bonuses are calculated using predominantly GAAP drivers (i.e. Accident Year accounting), whereas underwriters write business against an underwriting year. This has the effect that any deteriorations in back-year reserves is captured as a movement in the current reporting year.

As part of the agreements with all staff receiving Restricted Stock Units (“RSUs”), there are good and bad leaver provisions in the contracts.

With respect to claw backs, some employees do have specific claw back provisions in their contracts (including the CEO of the Company). These allow the Company to recover unvested RSUs that have been paid if underwriting performance subsequently deteriorates.

B.1.3.1 Pension scheme

The Company does not provide any supplementary pension to its Independent Non-Executive Directors.

The Company provides a workplace pension scheme where all eligible members are automatically enrolled into the scheme and non-eligible or entitled workers can opt in to join the scheme or enrol in a Personal Retirement Savings Account (“PRSA”). The pension scheme is a Group Flexible Retirement Plan which is designed to give members flexible ways to save for retirement. Both the employer and employee pay in a contribution which at the least meet the minimum legislative amount. The scheme has a default fund set up so members funds will automatically be invested in the default fund unless they actively choose their own investment funds.

B.1.3.2 Material transactions with shareholders, persons with significant influence and Board members

The Company has had no material transactions with shareholders, persons with significant influence nor members of Board during the reporting period.

B.2 Fit and Proper Requirements

The Central Bank mandates that individuals performing Pre-Approval Control Functions (PCF) or Controlled Function (CF) roles remain fit and proper to undertake the role. Central Bank regulations4 provide for a comprehensive list of PCFs, e.g. Board Directors, CEO, CRO, CFO, HOAF all of which must be pre-approved by the Central Bank before they can take up a PCF position. The Company has a Fit and Proper Policy in place that outlines the various checks at recruitment and throughout employment. In particular, when deciding whether a person is fit and proper, the Company needs to be satisfied that the individual:

Has the personal characteristics (including being of good repute and integrity);

Possesses the level of competence, knowledge and experience;

Has the qualifications to undertake the role; and

Has undergone or is undergoing all training required to enable such person to perform his or

her key function effectively and in accordance with any relevant regulatory requirements,

including those under the regulatory system, and to enable sound and prudent management of

the Company.

When deciding whether the Board is fit and proper, the Company seeks to ensure that the Directors collectively possess appropriate qualifications, experience and knowledge about at least:

Insurance and financial markets;

Business strategy and business model;

Systems of governance;

Financial and actuarial analysis; and

Regulatory framework and requirements.

4 Fitness and Probity Standards (Code issued under Section 50 of the Central Bank Reform Act 2010), as amended.

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Fitness and propriety is checked at recruitment stage through appropriate due diligence and challenge of an individual’s curriculum vitae. Appropriate financial and criminal checks are carried out prior to recruitment of an individual and probation periods are set commensurate with the role. Ongoing assessment of fitness and propriety of all employees is assessed through the annual appraisal process. Performance of the Board is also assessed annually through the Board performance review process.

B.3 Risk management system including the own risk solvency assessment

Risk Management Strategy

The Board is ultimately responsible for ensuring the effectiveness of the risk management system, setting the Company’s risk appetite and approving the main risk management strategies and policies. The Risk and Compliance function co-ordinates risk management activities within the Company through the Enterprise Risk Management (“ERM”) system, which consists of procedures to identify, measure, manage, monitor and report risk.

The Risk Management process at the Company begins with the strategy and corresponding risk appetites set by the Company’s Board. Using top down risk assessment tools, the Risk and Compliance team forms an understanding of how inherent risk is created and managed within the business model.

A detailed risk register is maintained and kept up to date through an ongoing process. Regular reporting against the risk appetite is conducted through a set of carefully selected key risk indicators, which inform the Board. The controls that respond to inherent risk are also tested through a programme of monitoring.

Annual formal assessments of the Company’s Capital are performed via the Own Risk and Solvency Assessment (“ORSA”) process and the capital position is stressed to test for the Company’s resilience to unforeseen events.

Through the Risk and Compliance team’s various reporting mechanisms, the Board is kept informed and the strategy is reviewed at least annually in light of the Company’s risk profile.

An overview of the key aspects of the Company’s risk management process is as follows:

B.3.1.1 Risk and Control Self-assessments (RCSAs)

RCSAs are performed by each department, under the oversight of the Risk and Compliance team. Risks and controls are recorded in the Company’s risk register. All risks are given an inherent, residual and target rating, using a risk matrix. RCSAs are regularly reviewed with an in-depth review meeting with the risk department at least annually.

In addition to this processes, all employees are encouraged to report any additional risk to the Risk and Compliance team as soon as possible after it is identified.

B.3.1.2 Top-down risk assessment

At least once a year, members of the Senior Management team meet to perform a ‘top-down’ risk assessment as part of a strategy review. The Head of Risk and Compliance forms part of this process as a member of the Senior Management team and as facilitator to the risk assessment.

B.3.1.3 Risk register (Magique)

All risks and controls are recorded in the Magique system. The Magique System is an industry standard software tool that supports ERM. Each risk is assigned an owner, who is responsible for assessing the risk or performing the control.

AIU DAC Risk Management Process Strategy Appetite Identification Measurement Management Monitoring Reporting

1. RCSAs

2. Top-down risk assessment

3. Risk Register

4. KRI Reporting

5. Stress tests

6. Incident reporting and escalation

7. Controls & Compliance Monitoring

8. Capital Modelling & Capital Allocation

9. ORSA

10. Risk Matrix

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B.3.1.4 Key Risk Indicator (KRI) reporting

KRIs are monitored and reported to the Risk and Compliance Committee every quarter.

B.3.1.5 Stress testing

Stress tests are applied to the Company’s business plan at least annually. A range of scenarios is considered, based on the risks identified by senior management, the RCSAs and the top-down risk assessment. The scenarios which produce the biggest losses are further stressed to produce Reverse Stress Tests (RSTs) to determine the point at which the Company would fail.

Stress tests are performed whenever there is a material change in risk profile, which would include but is not limited to: material change to reinsurance agreements; entry into a new class of business; change in investment policy; purchase of a subsidiary by the Company.

B.3.1.6 Incident reporting and escalation

The Company operates an incident reporting and escalation framework designed to capture operational risk events for the purpose of analysis, reporting and improvement of internal controls.

Once identified incidents are reported to the Risk and Compliance function. Incidents are recorded in the Magique risk management system and this acts as the main repository for incident reporting. Incidents will be reviewed by the risk department and an action plan put in place. Incidents will be escalated to the appropriate level, depending on their severity.

Risks that are not already recognised in Magique will be recorded, to ensure that the risk register is as comprehensive as possible.

B.3.1.7 Controls and Compliance monitoring

The operating effectiveness of controls is assessed independently through audit, monitoring and other oversight activities performed by Risk, Compliance, Internal Audit and other key support functions within the Company. Key controls are prioritised for regular assessment, with the remainder of the control framework being subject to annual or biennial assessment as a minimum.

B.3.1.8 Capital modelling

The Company is building a stochastic capital model, which will be used to evaluate its capital requirements. Currently, capital is assessed as part of the ORSA process and effectively as a function of Regulatory Capital. The stochastic capital model will help the Board to define a clear risk adjusted return on capital target, as well as improving the general resilience of the Company’s capital base.

B.3.1.9 Capital allocation

The Company currently allocates capital to classes of business at a high level. With the development of a stochastic capital model, the capital allocation process will be further strengthened. Risk Management supports the business in helping to embed this into the Company’s underwriting disciplines.

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Own Risk and Solvency Assessment (ORSA)

The above diagram shows how the various aspects of risk management, capital management and regulatory reporting under Solvency II fit together for the Company.

The Own Risk and Solvency Assessment forms a key part of Enterprise Risk Management at the Company and is performed at least annually. It is the process through which the Board and Management team assess the risks faced by the Company, both now and in the future and the Company’s own assessment of the level of own funds that it believes are necessary to meet the strategic goals of the Company.

Regulatory capital is the Regulator’s assessment of the Company’s capital required to continue and meet the Regulator’s objectives, which includes maintaining safety and soundness in the wider financial system. The Company’s solvency risk appetite is that capital should always remain above a margin of these limits and has set this to be 140% of the Solvency Capital Requirement (“SCR”) which is the regulatory capital requirement under Solvency II.

In broad terms, the ORSA process seeks to have a clear understanding of the Company’s historic and prospective strategy and what risks this creates for the Company’s balance sheet both now and in the future. Capital should then be held at a level that allows the Company to achieve this strategy and manage these risks.

The Company has historically used a deterministic model to calculate its economic capital, however this is limited in capturing risks, because it involves running a small number of scenarios which are binary in nature. The Company recognises that due to its historic growth and more complex risk profile, a more refined economic capital assessment is required. Therefore, the Company undertook a project in 2016 to build a Stochastic Capital Model which is capable of capturing a much wider range of risks, against which a vastly larger range of scenarios can be tested. This will inevitably lead to a more sophisticated approach to calculating the Company’s capital.

For the purposes of the 2016 ORSA, the Company used a deterministic approach, quantifying the impact of scenarios on the balance sheet and comparing them with the Solvency II Regulatory Capital position. The Company chooses to hold its capital appetite at one-hundred and forty-percent, as it

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believes that the SCR under Solvency II is a prudent assessment of its capital. Therefore, it is assumed that:

AIU Capital Assessment = Regulatory Capital (SCR) x 140%

The Company has demonstrated that the Standard Formula is an appropriate measure of its risk profile for calculating Regulatory Capital. This gives the Board comfort that the SCR plus a buffer is a conservative approximation of the capital required, until such time as a Stochastic Model allows for a more sophisticated assessment.

The Company uses externally sourced software (Vega) to calculate its Solvency II Standard Formula solvency capital requirement (SCR) as well as populating the Solvency II quantitative reporting templates (QRTs).

The Company will complete its ORSA process annually, on a ‘business as usual’ basis or if there is a material change in its risk profile.

B.4 Internal control system

Internal Control system

Internal control is integral to risk management and the principal means by which risk is managed.

Primary responsibility for the identification, monitoring, control and reporting of significant risk rests with the heads of the various business functions on an on-going basis. Risk and control owners are identified for all significant risks and control. The Enterprise Risk Management framework ensures that these risks and controls are reviewed on a regular basis.

An effective risk management system requires technical input from the Actuarial function in the quantification and modelling of certain risks. The Actuarial function is therefore responsible for providing expert technical advice and input to the Risk Management function to facilitate the implementation of elements of the risk management system.

The system of internal control constitutes the first and second Lines of Defence of the “Three Lines of Defence” risk management model (referred to above).

The Internal Audit function is responsible for auditing the control environment against the audit plan agreed by the Audit Committee.

On behalf of the Board, the Audit Committee and the Risk and Compliance Committee regularly review the Company’s system of internal control. The review covers all controls, including financial, operational and compliance controls, completeness and accuracy of data and the risk management process. Necessary actions are taken to remedy any significant control failings or weaknesses identified.

By virtue of being a material overseas subsidiary of AFSI, the Company is subject to the legal requirements of the US Sarbanes-Oxley Act, Section 404 (‘SOX’). This Act requires the external auditor of AFSI and its management to report on the effectiveness of the Company’s internal controls under the Public Company Accounting Reform and Investor Protection Act 2002. A central SOX controls framework is developed at Group level which is cascaded down to all material subsidiaries within the AmTrust group. The controls within the Company’s SOX framework are routinely tested and attested by management. Management produce an internal control report as part of their annual report which assesses the effectiveness of the internal control structures and processes around financial reporting. The assessment is risk-focused and includes an:

Assessment of the design and operating effectiveness of internal controls around significant accounts (i.e. where there is a risk of material misstatement) and relevant assertions;

Understanding of the flow of transactions in order to identify points where a misstatement could arise;

Assessment of entity-level controls;

Fraud risk assessment;

Evaluation of controls in place to mitigate the risk of fraud;

Assessment of controls in place over the financial reporting process;

Scales the assessment based on the size and complexity of the Company; and

Conclusion on the adequacy of internal control over financial reporting.

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Compliance with SOX is monitored by the Risk and Compliance function. The outcome of SOX monitoring is reported to the Audit Committee.

Compliance function

The Compliance function is responsible for advising the Board and management team on compliance with existing and emerging legal, regulatory and administrative provisions. In the Company, the Compliance function operates within the Risk and Compliance function and the Head of Risk and Compliance acts as the Chief Risk Officer and Head of Compliance.

The Compliance function has ultimate recourse to the Company’s Board and has the right to escalate to the Board, directly or through its Committees, any instances of non-compliance.

The Compliance function takes responsibility for identifying and assessing the wide-ranging internal and external obligations the Company has. The Compliance function helps to ensure that the Company clearly understands its regulatory risks and the prevailing requirements.

The Compliance function undertakes checks to ensure that compliance obligations are being met after implementation through a systematic, disciplined and risk-based approach to evaluating the effectiveness of compliance controls.

B.5 Internal audit function

The mission of the AmTrust Internal Audit function is to help the Board and the management team to protect the assets, reputation and sustainability of the organisation.

This is achieved by:

Assessing whether all significant risks are identified and appropriately reported by management and the Risk function to the Board and management team;

Assessing whether they are adequately controlled; and

By challenging the management team to improve the effectiveness of governance, risk management and internal controls.

Internal Audit is independent from the business and is directly responsible to the Chairman of the Audit Committee, with a day-to-day administrative reporting line to the Company’s Chief Executive Officer. Internal Audit shall have free and unrestricted access to the Chairman of the Board, the Chairman of the Audit Committee and the Chief Executive Officer.

Those working within Internal Audit are not permitted to perform day-to-day control procedures or take operational responsibility for any part of the Company’s operations outside Internal Audit. Management is responsible for the establishment and ongoing operation of the internal control system. The Audit Committee reviews the scope and nature of the work performed by Internal Audit to confirm its independence.

B.6 Actuarial function

The purpose of the Head of Actuarial function (“HoAF”)5 and Actuarial function within the Company is to provide support to the Company in many areas including reserving, pricing and capital management. Additionally, other statistical and management information support is provided where necessary. This work is required to be undertaken in an objective and independent manner whilst incorporating feedback from the business where appropriate.

The Actuarial function is a Key Function, the HoAF being the Key Function holder. The HoAF is a qualified actuary and is a Fellow of the Society of Actuaries and reports to the Chief Executive Officer. Other members of the team are either qualified actuaries; working towards becoming a qualified actuary; or sufficiently qualified by experience to undertake the duties assigned to the individual.

The HoAF or his representative attends the Reserving Committee. The HoAF will rely on work produced by other members of the Actuarial function to fulfil the necessary roles and responsibilities.

The Actuarial function has the following specific responsibilities:

Preparation of an Actuarial Functions report annually to the Board which reports on the

activities of the Actuarial function;

5 Head of Actuarial Function, PCF 48, Fitness and Probity Regime for (Re)Insurance Undertakings under Solvency II.

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Production of the Technical Provisions in accordance with Solvency II principles and ensuring

that methodologies and underlying models used are appropriate;

Preparation of the Actuarial Report on Technical Provisions;

Monitoring the best estimates against actual experience;

Providing assistance for the pricing of insurance risks;

Providing inputs into the calculation of the Solvency Capital Requirement (“SCR”);

Providing assistance for the preparation of business plans;

Working closely with the Risk Management function (“RMF”) to facilitate the implementation

of an effective risk management system;

Assessing the data quality used in actuarial functions;

Reporting to the Board on the reliability and adequacy of the Technical Provisions calculation;

Reviewing reinsurance arrangements;

Contribute to the effective implementation of the Risk Management System;

Opining on the ORSA process;

Opining on the overall underwriting policy; and

Opining on the adequacy of reinsurance arrangements.

B.7 Outsourcing

Outsourcing is an important aspect of the Company’s business model. The majority of the Company’s key outsourcing risk lies in its use of third party coverholders, agents and intermediaries in its claims management, underwriting and distribution processes.

Key outsourcing risk refers to those functions that are required by the Company; either from external or from intra-group providers which are essential to the Company’s operations and that the Company would otherwise be unable to deliver its services to policyholders without the outsourced function(s).

The Central Bank requires the Company to take reasonable steps to avoid undue additional operational risk and not to undertake the outsourcing of key functions in such a way as to either: risk impairment of the firm’s own internal control; or risks associated with the Central Bank’s ability in monitoring the Company’s compliance obligations under the regulatory system.

The Company’s outsourcing internal control framework, includes but is not limited to:

Due diligence undertaken of a prospective provider in order to identify the potential operational,

prudential and conduct of business regulatory risks that may be associated with the placement

of the outsourced function to specific provider(s);

Formal contract management and monitoring;

Routine management attestation as to continuous control compliance in relation to

outsourcing; and

Independent internal monitoring by the Compliance function; internal audit; and the Company’s

third party audit programme as routinely approved and monitored by the Risk and Compliance

Committee.

B.8 Any other information

Taking all of the above into account, the Company’s assessment is that its system of governance is adequate for a company of its scale and complexity.

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C. Risk Profile

C.1 Underwriting risk profile

Underwriting risk refers to fluctuations in the timing, frequency and severity of insured events, relative to the expectations of the firm at the time of underwriting.

The Company uses a suite of Key Risk Indicators (KRIs) to monitor its exposure to underwriting risk that are evaluated each quarter. These include: volume of premium underwritten, by class of business; priced loss ratios in comparison with plan; ultimate loss ratios in comparison with plan; concentration of premium and profit contribution by class and deterioration in prior year reserves.

Material risk exposures

The Company is exposed to premium risk, that is, the risk that premiums are insufficient to cover the value of claims made and reserve risk, the risk that on-going claims are settled at a higher value than previously expected. The majority of the Company’s material underwriting risk exposure comes from the US Surplus Lines business, which represented the largest class of business during 2016. This class is casualty insurance and underlying claims exposures can take a long-time to properly realise, hence there is a material risk of adverse reserve development on all current and prior underwriting years where The Company underwrote these programmes. The SCR quantifies the potential for adverse development as part of the calculation of the premium risk and reserve risk calculation. An additional component of the SCR which is driven primarily from the Company’s US Surplus Lines business is the SCR component for catastrophe risk. Although the Company believes that this account and its other lines of business, are exposed to limited catastrophe risk, due to the treatment and classification of this account within the SCR calculation the Company receives a disproportionality high capital charge for Catastrophe Risk.

Material risk concentrations

The Company’s underwriting risk exposure is concentrated in the General liability class of business. Around forty-two percent of the Company’s premium is attributable to this class.

Material risk mitigation

This risk is mitigated through a range of management controls including the Risk Authorisation Form (“RAF”) Process which is a key control. In addition to the RAF process, the Actuarial Pricing team review new business to determine that rates are adequate. Within underwriting teams, a peer review also takes place. There is constant monitoring of underwriting performance by management, which allows corrective action to be taken if a piece of business is not performing as expected.

The Company also uses reinsurance to mitigate underwriting risk. This takes the form of a group quota-share agreement with AmTrust International Insurance Ltd (Bermuda) on all business written by the Company as well as quota share and excess of loss contracts on individual classes of business. All programmes must be approved by the Company’s Underwriting Committee.

Risk sensitivities

Scenarios were devised during the ORSA process to measure the impact of an increase in the Medical Malpractice loss ratio by fifty percent and the failure of the Company’s two largest business partners. The Company was able to withstand both these scenarios, which are considered to be highly unlikely.

Other material information

None noted.

C.2 Market risk

Market risk is the risk of loss of income or decrease in the value of assets caused by movements in the level and prices of financial instruments. Market risk includes factors such as equity values, property values, interest rates, foreign exchange and spread risk.

The KRI process identifies and measures the key market risk exposures by closely monitoring the currency and duration mismatch to capture exposure to currency and interest rate risks, as well as the composition of the bond portfolio holdings by credit ratings to capture exposure to spread risk.

Investments are reviewed quarterly at the Audit Committee and through the Investment Committee.

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The Company’s material exposures to market risk are: interest rate risk and spread risk on its bond portfolio; foreign exchange risk on its currency exposures and equity risk on its strategic investments in subsidiaries.

The bond portfolio consists of corporate and government bonds. It is exposed to interest rate risk as well as to credit-spread risk. Fluctuations in rates of inflation influence interest rates, which in turn impact the market value of the investment portfolio and yields on new investments. Thus, rising interest rates would have an adverse impact of the bond portfolio and would drive the value of the bonds down. Whereas, widening credit-spreads would also negatively impact the value of the bond portfolio.

Property comprises less than five percent of the investment portfolio and doesn’t pose any material risk to the Company’s business.

The Company manages its foreign exchange risk against its functional currency, which is presented in euro. Foreign exchange arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The Company is exposed to currency risk in respect of liabilities under policies of insurance denominated in currencies other than euro. The most significant currency to which the Company is exposed is the US Dollar.

The Company has a Swedish agency operation, whose net assets are exposed to foreign currency translation risk.


The Company’s material market risk exposures are to its foreign currency exposure to the US Dollar, Swedish Kroner and the exposure of its predominantly fixed rate corporate bond investment portfolio to spread risk.


The Company operates a conservative investment strategy, investing primarily in fixed rate corporate bonds, money market deposits and cash. The Company has little appetite for investments in equities (other than wholly-owned subsidiaries) and complex investments such as derivatives. By investing in relatively simple assets, the Company fulfils the prudent person principle because it is able to properly understand its investment risks.

Investment management is outsourced to another company within the group. A set of investment management guidelines has been drawn up, adherence to which is monitored by the Investment Committee and the Audit Committee.

The Company monitors interest rate risk as part of its regulatory reporting process by monitoring duration of assets and liabilities. Any gap between the mean duration of the assets and the estimated mean duration of the liabilities is minimised by means of buying and selling fixed interest securities of different durations.

The Company has investments in property through ownership of a property in Milan which is occupied by its branch operation in Italy.

The Company equity investments are strategic in nature, being investments in subsidiaries and affiliates and are approved by the Board.

The Company is exposed to foreign exchange risk, by operating in multiple currencies. The Company seeks to mitigate the currency risk by matching the estimated foreign currency denominated liabilities with assets denominated in the same currency. The Company’s currency matching strategy is well protected against depreciation of the euro.


None noted.

C.3 Credit risk

Credit risk is the potential loss arising principally from adverse changes in the financial condition of the issuers of fixed maturity securities and the financial condition of third party reinsurers.

The risk and management team identifies and measures the key credit risk exposure by monitoring rating of bank, rating of reinsurer, bond rating, exposure to individual external reinsurer counterparty,

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exposure to single bank as percentage of Solvency Capital Requirement (SCR), credit extended to intermediaries compared with limits set by Finance and length of time overdue.


The Company is subject to material risk exposures with respect to its reinsurers, banks and bond counterparties.


The Company is exposed to credit risk in relation to material accounts with Reinsurance counterparties: Maiden Insurance Company Limited and AmTrust International Insurance Limited (AIIL).

The Company is exposed to general economic, business and industry conditions. Adverse general economic conditions may cause, among other things, significant reductions in available capital and liquidity from banks and other credit providers. The Company’s largest bank exposures are to BNP Paribas and JP Morgan Chase.

The Company’s largest corporate bond exposure is to Vale Overseas Ltd, making up of just over six percent of the investment portfolio. Other large bond exposures are to the European Investment Bank and Fannie Mae.


In order to reduce exposure to reinsurance credit risk, the financial condition of reinsurers is evaluated and reinsurance is placed with a diverse group of companies and syndicates that are believed to be financially sound. Larger exposures to AIIL and Maiden are fully collateralised. The credit quality of reinsurers is monitored when placing new and renewal reinsurance, as well as on an ongoing, current basis. The Company uses objective criteria to select and retain its reinsurers, including requiring a financial strength rating of “A-” or better from A.M. Best Company.

To reduce credit risk, the Company performs ongoing evaluations of its customers’ financial condition.

Credit risk related to the issuers of fixed maturity securities is addressed by investing primarily in fixed maturity securities that are rated “BBB-” or higher by Standard & Poor’s. Exposure is limited by the employment of diversification policies that limit the credit exposure to any single issuer or business sector.

The Company manages the levels of credit risk it accepts by reviewing exposures regularly and reporting to management of significant counterparties. Credit limits are also in place for certain counterparties as is deemed appropriate within the business.

Exposures to individual policyholders and groups of policyholders are considered through the ongoing monitoring of the controls associated with regulatory solvency.

Exposures to banks are limited to those whose credit ratings are A or higher, except where required for business reasons, typically in jurisdictions where there are no A rated banks available. In this case, exposures are kept to a minimum.

Risk sensitivities

None noted.


None noted.

C.4 Liquidity risk

Liquidity risk represents the Company’s potential inability to meet all payment obligations when they become due and the risk stemming from the lack of marketability of an investment security that cannot be bought or sold quickly enough to realise cash.

Via the KRI process a liquidity ratio is monitored to identify and measure liquidity risk exposures. The finance team carries out regular cash-flow forecasting and analysis to monitor the Company’s liquidity needs.


There are no material risk exposures to liquidity risk, as the majority of assets are invested in highly liquid corporate bonds.

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However, the major threat to liquidity could occur during a catastrophe when a large number or claims are received at once or there may be a prospect of a major significantly large claim. The Company considers this scenario to be remote.

Reinsurance may additionally pose a residual liquidity risk through delays in payment by the reinsurer or its default which, while classed as a credit risk event would also present a potential liquidity issue.


The Company’s liquidity risk exposure is concentrated in reinsurance contracts, financial assets (bonds) and property.


The Company’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effect on the Company’s financial performance. It manages these positions within an asset liability management (ALM) framework that has been developed to minimise the risk of significant deterioration of the investment portfolio while earning profitable returns from those investments.

The Company invests mainly in corporate bonds, which are normally readily convertible into cash, so it holds relatively small amounts of cash. It accepts the risk that during times of stress, there may be market value losses realised by liquidating bonds.

The Company maintains sufficient cash and highly rated marketable securities, to fund claim payments and operations.

Expected profit in future premiums

The value of expected profit in future premiums is €1.9m. This amount is highly illiquid, but represents only 1.16% of the value of own funds.

Risk sensitivities

Unless there is a larger claim payment due to a major catastrophe event or a default in collecting reinsurance receivables due to adverse market conditions, the Company has no significant impact to its liquidity.


None noted.

C.5 Operational risk

Operational risk is the risk that the Company will not be able to operate in a fashion whereby the strategic objectives of the Company can be met due to inadequate or failed internal processes, people and systems, or from external events. It arises out of actions undertaken within the Company, intermediaries, investment management companies or outsourced agencies and individuals.

The Company has risk management processes in place, such as third party audit, internal audit, controls testing, project management, Risk and Control Self-Assessment (RCSA), IT Governance Committee to assess and monitor operational risk exposures.


The Company is exposed to IT, Data, Outsourcing, Underwriting, Reinsurance, Fraud, Legal, and Reputation risks.

As a result of limitations inherent in all control systems, it may not be possible to adequately prevent fraud or errors from occurring. Judgements in decision making can be faulty and breakdowns may occur through simple human error.

In addition, any ineffectiveness in internal controls could have a material adverse effect on the Company’s business. For instance, failure to maintain pricing disciplines and robust underwriting controls; poor quality management information or IT systems to capture data and business performance; failure to identify appropriate opportunities in a soft insurance cycle and prolonged competition; a potential reduction of control over the actions of third parties operating on its behalf (outsourcing).

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The Company’s material risk concentrations are in IT and Outsourcing.

The majority of the Company’s core lines are sold through independent third-party intermediaries, agents, retailers or administrators, many of whom the Company has worked with for several years, in particular in the Casualty and Warranty accounts.

IT is an integral aspect of the Company’s day-to-day business operations and as such, any system failure can impose a serious threat to the Company operations.


The Company does not seek to take on operational risk in order to generate a return. However, it recognises that some degree of operational risk is an unavoidable consequence of remaining in business. It therefore seeks to mitigate this risk through its corporate governance and internal control mechanisms, RAF process, peer view, due diligence and business continuity and Sarbanes-Oxley controls.

All of the Company’s operational risks are captured within the Company’s risk register through a system called “Magique”. Risk Management carry out a risk and control self-assessment exercise where meetings are held with each key risk owner to review and update the risk registers with new risks and controls, as well as judging whether the ratings for inherent and residual risks are still valid.

Risk sensitivities

The Company has considered a number of operational risk scenarios.


None noted.

C.6 Other material risks

Legal and Regulatory risks

The risk of non-compliance with regulation and legislation.

The Company does not seek to take on legal and regulatory risk in order to generate a return. However, it recognises that some degree of legal and regulatory risk is an unavoidable consequence of remaining in business. It therefore seeks to mitigate this risk through its corporate governance and internal control mechanisms. Awareness of the risks and the Company’s control mechanisms are maintained through its policies and procedures framework and training programmes.

Strategic risk

Risks arising from failure to sufficiently define the direction and objectives of the entity, together with the resourcing and monitoring of the achievement of the same.

The Company has a well-developed business planning process and its business plans are approved by the Board. The business plans are also used in the Own Risk and Solvency Assessment (ORSA) process.

Governance risk

Risks arising from the failure to demonstrate independent and proper stewardship of the affairs of the entity in order to safeguard the assets of the entity's shareholders and the overall interests of its stakeholders.

The Company regards a strong Governance framework to be vital in the achieving its objectives as well as providing transparency and accountability to its various stakeholders. A system of internal control and governance has been developed using the “three lines of defence” model.

Group risk

The risks arising from other parts of its group, through parental influence or direct contagion.

The Company maintains a good relationship with its ultimate parent and expects that, at all times, it will remain suitably apprised of all of the material risks within the group that may, if crystallised, have negative impact upon the business strategy and/or cause detriment to its customers.

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There is regular engagement between executives and senior managers of AFSI and the Company. The AFSI Group CEO is also a PCF-2 under the Central Bank’s Fitness and Probity regime and sits on the Company’s Board. In addition, two of AFSI’s other Board Directors are PCF-2 (Independent Non-Executive Directors) on the Board of the Company.

Solvency risk

The risk that the entity fails to maintain adequate levels of capital resources of sufficient quality and quantity in order to carry out its business objectives and in order to meet all domestic and international regulatory considerations regarding the capital resource requirements.

The Company ensures it is solvent at all times through: monitoring of its solvency position; management accounts; solvency forecasting in ORSA and prior to any strategic decision making.

C.7 Any other information

None noted.

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D. Valuation for solvency purposes

The table below shows the valuation on a Solvency II basis of the Company’s assets and liabilities as at 31 December 2016.

€’000 Solvency II

value (C1101)

Statutory accounts value

(C0020)

Assets

Deferred acquisition costs 0 35,562

Property, plant and equipment held for own use

11,337

11,156 Investments (other than assets held for index-linked and unit-linked contracts)

151,440

150,290

Bonds

150,251

149,105

Government Bonds

28,822

28,595

Corporate Bonds

93,654

92,815

Collateralised securities

27,774

27,694

Deposits other than cash equivalents

1,190

1,185

Loans and mortgages

34,994

34,711

Other loans and mortgages

34,994

34,711

Reinsurance recoverables from:

494,253

575,290

Non-life and health similar to non-life

494,253

575,290

Non-life excluding health

490,278

570,120

Health similar to non-life

3,975

5,170

Insurance and intermediaries receivables

7,522

96,297

Reinsurance receivables

3,866 0

Receivables (trade, not insurance)

20,680

22,671

Cash and cash equivalents

30,718

30,718

Total assets

754,810

956,694

Liabilities

Technical provisions – non-life

580,142

677,702

Technical provisions – non-life (excluding health)

576,924

671,620

Best Estimate

565,288 0

Risk margin

11,636 0

Technical provisions - health (similar to non-life)

3,218

6,082

Best Estimate

3,218 0

Deposits from reinsurers

263 263

Insurance & intermediaries payables 0

2,104

Reinsurance payables 0

57,853

Payables (trade, not insurance)

14,042

44,651

Total liabilities

594,447

782,573

Excess of assets over liabilities

160,363

174,121

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D.1 Assets

As a general principle, the Company’s assets and liabilities are valued differently when calculating its regulatory capital (SCR) under Solvency II and when preparing its annual accounts for filing at the Companies Registration Office. The former applies the valuation rules from the Solvency II Directive, and the latter applies valuation rules under Generally Accepted Accounting Principles (GAAP) in Ireland.

The valuation rules from the Solvency II Directive use International Financial Reporting Standards (IFRS) as a starting position with various changes applied to move to an economic balance sheet position. Irish GAAP is largely equivalent to the accounting principles applied under IFRS, although differences do exist.

This section highlights the way AIU values its assets and liabilities using the Solvency II valuation principles and where relevant, explains any material differences to the Irish GAAP valuation approach followed in its last reported financial statements.

In general, the valuation method is aligned with Irish GAAP and so the basis of preparation aligns with the Irish GAAP accounting policies. Exceptions to these methods are outlined in the relevant sections below.

Deferred acquisition costs

Solvency II Value Statutory Accounts Value

Assets €’000 €’000

Deferred acquisition costs 0 35,561

Deferred acquisition costs are valued at nil for Solvency II purposes. Instead, all cashflows related to expenses due to servicing recognised insurance obligations are considered in the best estimate technical provisions.

Financial assets at fair value through the profit and loss

The Company has an investment portfolio made up of corporate and government bonds accrued interest is added to the GAAP amount to reach the Solvency II balance sheet.

Investments in subsidiaries and participations

In accordance with Delegated Regulation (EU) 2015/35 Article 13, the Company values its holdings in related undertakings, in accordance with the following order of hierarchy:

Valued based on quoted prices in active markets where available.

Where quoted prices in active markets are not available, valued on an adjusted equity method

(based on Solvency II valuation of underlying net assets or for related undertakings other than

insurers where this is not practicable, based on IFRS with the deduction of goodwill and

intangibles).

For related undertakings other than subsidiaries, where quoted prices in active markets are not

available and where it is not possible to apply an adjusted equity method, an alternative

valuation method (e.g. mark to model) may be used.

As none of the related undertakings are listed, those entities which are subsidiaries are valued on the adjusted equity method.

For the purpose of subsidiaries which are insurance entities, the adjusted equity method means using the excess of assets over liabilities using Solvency II valuation principals (Article 13(4)).

For the purpose of subsidiaries other than insurance entities, the adjusted equity method means using the excess of assets over liabilities using International Accounting Standards excluding any value in goodwill or intangibles (Article 13(5)). For this purpose, the entity has assumed the Irish GAAP position is a reasonable approximation for IFRS.

As equity holdings, the investments attract equity and concentration risk charges as appropriate.

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Tangible fixed assets

Under Solvency II the valuation of property, plant and equipment should be a reliable estimate for the amount which the assets could be exchanged between knowledgeable willing parties in an arm’s length transaction.

Less than one million euro is held within plant and equipment and as a result, management do not believe that using depreciated cost would generate a materially incorrect position against the market value.

Property within the Company is material and is valued using fair value in the Irish GAAP accounts. As a result, this same approach is adopted within the Solvency II position.

For the purpose of the standard formula, property is subject to property risk while plant and equipment has been deemed to fall into the other assets included within the equity risk sub-module.

Insurance debtors and creditors

Insurance debtors and creditors are valued at amortised cost, consistent with the approach under Irish GAAP.

An adjustment is made to these balances for the impact of future premiums (including commissions and reinsurance as appropriate). Future premiums relate to the future collection or payment of cash relating to premiums and commissions which are dealt with as part of the wider technical provision calculation.

Future premiums relating to business written before the period close (claims provisions and premium provisions excluding Booked But Not Incepted (“BBNI”)) effectively relate to cash movements relating to premiums already loaded in the GAAP accounts. As a result, insurance debtors and creditors have been reduced by the relevant future premium balances to avoid double counting the numbers within the SII accounts.

Future premiums relating to business bound but not incepted at the period close are not included within the GAAP accounts. As a result, this future premium is booked through the technical account.

Other

At present no further adjustments are made to the Irish GAAP balance sheet to move to Solvency II.

D.2 Technical Provisions

Technical Provisions represent a valuation of the Company’s obligations towards policyholders. Under Solvency II these are required to be calculated as the sum of:

a) best estimate equal to the probability-weighted average of all future cash-flows, taking account of the time value of money; and

b) a risk margin equivalent to the amount that an insurance undertaking would be expected to require in order to take over and meet the technical provision obligations.

On a Solvency II basis the total technical provisions, including the risk margin, were €85.9m compared to €96.7m on a statutory basis, a difference of 12.63%.

The following table shows a summarised the Company’s total Technical Provisions as of Q4 2016.

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Contacts


Recoverables

€’000 €’000 €’000 €’000 €’000



51,631 1,171 52,802 (44,084) 8,718



49,166 1,145 50,311 (41,785) 8,526

Assistance 2,015 47 2,062 (1,710) 352


124,417 1,526 125,943 (114,578) 11,365

Total 568,506 11,636 580,142 (494,252) 85,889

Underlying Uncertainties

The Actuarial function has employed techniques and assumptions that it believes are appropriate for estimating the TPs. However, the results of these techniques are subject to uncertainty and it should be recognised that future claim emergence is likely to deviate, perhaps materially, from the estimates. The uncertainties in the estimates for the Company are increased due to:

The small size of some classes.

The lack of development history and hence reliance on benchmarks in some classes.

An increased reserve uncertainty on long-tailed classes. For example, the Medical Malpractice business is particularly long-tailed and has limited development history. Additionally, market results for this class have been particularly volatile increasing the uncertainty in the best estimates for this class.

Uncertainty over the losses on remaining unearned exposures, particularly for the classes earning over extended periods such as the Structural Defects business or the Warranty business.

Uncertainty over the number and magnitude of potential large losses on long-tailed business.

The existence of profit caps and profit shares for some programmes also adds to the uncertainty in the Company’s aggregate estimates.

SII Related Uncertainties

Additional uncertainties because of the Solvency II adjustments include:

Uncertainty over the number and magnitude of potential large losses (and catastrophes) on all business that is unexpired at the valuation date.

Uncertainty over the provision for Events Not In Data (“ENIDs”) where, by their very nature, there is no data available.

Potential for deviation in the expected profits on un-incepted and unearned business.

Potential for deviation in payment patterns from expectations, resulting in an over or under-estimation of the level of discount.

Uncertainty over the volume of un-incepted business.

Uncertainty surrounding the future premium receivable.

Estimation of the Risk Margin.

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Differences between Solvency II valuation and Financial statements

The Company’s GAAP reserving policy requires the Actuarial function to calculate ultimate loss ratios with no margins for prudence or optimism. An explicit margin is added based on the reserving committee recommendations.

Solvency II technical provisions are evaluated on a best estimate cash flow basis with items such as unearned premium reserves are removed. To move the GAAP estimates to a Solvency II basis the following adjustments are made:

1. Removal of any margins in the GAAP reserves

This includes specific items such as equalisation reserves. The Company’s Board also holds an additional margin above the actuarial best estimate to allow for the uncertainty in the estimates. Expected reinsurance recoveries are allowed for separately for both proportional and non-proportional reinsurance.

2. Recognition of profit in the Unearned Premium Reserve

The full amount of unearned premiums is removed from the Technical Provisions. The best estimate of the claims liabilities associated with the UPR are added back, and expected reinsurance recoveries are allowed for separately for both proportional and non-proportional reinsurance.

3. Recognition of profits in business written prior to, but incepting after, the valuation date

The premium bound but not incepted serves to reduce the Technical Provisions. The best estimate of the claims liabilities associated with these premiums are added to the Technical Provisions. Expected reinsurance recoveries are allowed for separately for both proportional and non-proportional reinsurance.

4. Allowance for future premiums

Future premium cash flows are derived from the Company’s financial systems for both gross cash inflows and reinsurance cash outflows.

5. Allowance for Events Not In Data

Under GAAP technical provisions only make allowance for items that are implicitly included within the data or are “reasonably foreseeable”. Under Solvency II the best estimate must have reference to “all possible outcomes” including latent claims or very extreme high severity, low probability claims. Gross and ceded technical provisions are estimated separately.

6. Allowance for expenses required to service the run-off of the technical provisions

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Total GAAP

Reserves

Removal of GAAP

items

Removal of claims

floats

Removal of UPR

Profits

BBNI Profits Future Premiums ENIDs SII Expenses RI Bad Debt Discounting Risk Margin SII Technical

Provisions

AIUL GAAP to SII Technical ProvisionsAIU GAAP to SII Technical Provisions

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All expenses expected to be incurred in running-off the technical provisions including a proportion of fixed overheads are allowed for. These have been estimated using the latest financial projections and an estimate of the expected time to run-off the Technical Provisions based on the estimated claims payment patterns.

7. Allowance for Reinsurance Bad Debt (non-recoverable reinsurance)

Expected non-payment of reinsurance recoveries continues to be made but is calculated on a different basis. The expected default under Solvency II takes into account the timing of the expected payment by reinsurer and hence allows for a change in rating over time.

8. Allowance for the future cost of reinsurance in respect of written business

Some future reinsurance purchases will benefit business written at the valuation date and the expected cost of this spend is included in the Technical Provisions.

9. Allowance for the impact of policies lapsing

Some lines of business are subject to policies lapsing (or being cancelled) before the policy has expired or a claim has been made. An allowance for this reduction in future profits (or losses) is made based on historical data.

10. Allowance for future investment income (discounting)

Cash flows are discounted for the time value of money based on the expected timing of all cash flows. The yield curves (discount rates) for major currencies which are used to discount the cash flows are provided by the supervisors.

11. Allowance for a risk margin

This adjustment increases the overall value of the Technical Provisions from the discounted best estimate to an amount equivalent to a theoretical level, needed to transfer the obligations to another insurance undertaking. It is calculated based on a discounted cost-of-capital approach where the initial capital required to support the TPs is assumed to run-off in proportion to the run-off of the Technical Provisions, and a cost of capital of six percent is used.

Furthermore, the Company has significant reinsurance assets as most lines of business are covered by an eighty-five percent Quota Share. This cover is provided by AmTrust International Insurance Ltd (AIIL), which is another subsidiary company within the AmTrust Group. This quota share arrangement is fully collateralised.

Other lines such as Medical Malpractice are also covered by significant external quota shares (forty-five percent and forty percent). The Solvency II Technical Provisions also make allowance for potential recoveries from non-proportional reinsurance with the most significant covering the PI, Liability and Property classes.

Significant changes in assumptions

The most significant changes in the assumptions used to calculate the Technical Provisions are:

Medical Malpractice – the underlying loss ratios for this class have increased during 2016.

The credit for discounting has reduced due to the reduction in the yield curves (as provided by

EIOPA).

D.3 Other liabilities

Deferred tax

As a result of adjusting the GAAP balance sheet to an economic balance sheet for Solvency II additional gains and losses are created within the Company. The Solvency II framework permits deferred tax balances to be created on the differences between the tax base of assets and or liabilities and the value based on Solvency II principles.

The adjustments at the year-end resulted in an overall decrease. A deferred tax asset could be recognised but a prudent approach has been adopted and it has not been recognised.

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Loans payables and other liabilities

Solvency II Value Statutory Accounts Value

Liabilities €’000 €’000

Deposits from reinsurers 263 263

Insurance and intermediaries payables (Overdue) 0 2,104

Reinsurance payables 0 57,853

Payables (trade, not insurance) 14,042 44,651

Debts owed to credit institutions and payables to insurance and intermediaries, reinsurance and other trade, as well as the other liabilities, are valued at amortised cost, consistent with the approach under Irish GAAP, which is not considered to be materially different to the Solvency II valuation principal.

Receivables which are not yet due, are reclassified and dealt with as part of the technical provisions, described below. There are a number of other reclassifications made between the Irish GAAP balance sheet and the Solvency II balance sheet relating to these items to correctly classify items under the Solvency II categories.

D.4 Alternative methods for valuation

The Company does not use any alternative methods for valuation.

D.5 Any other information

None noted

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E. Capital Management

E.1 Own funds

The Company manages its Own Funds with the objective of always being able to satisfy both the MCR and the SCR plus a buffer. The Company prepares solvency projections for the following three years as part of its business planning process, which form part of the ORSA. In addition, short-term solvency projections are calculated whenever a significant transaction is considered by the Company.

Solvency calculations are prepared following the end of each quarter and compared with available Own Funds and this is included in the Risk function’s report to the Risk and Compliance Committee.

The Company’s capital resources are made up of Tier 1 capital instruments and comprise of fully paid ordinary share capital, preference shares plus the reconciliation reserve (accumulated profits on a Solvency II valuation basis.) There were no significant changes in the structure of Own Funds during the year; no share capital has been issued. There was one dividend payment of fifty-million euro approved by the Board.

The Company’s capital at the end of the year and the prior-year is shown in the table below.

€’000 Dec 2016 Dec 2015

Ordinary share capital 1,946 1,946

Members’ contributions 21,856 21,856

Capital redemption reserve 13,270 13,270

Reconciliation reserve 123,291 147,848

Own funds 160,363 184,920

The Company’s eligible amount of Own Funds eligible to cover the SCR as of 31 December 2016 is listed in the table below.

Solvency Overview (in €’000s), as of Dec

Tier Own Funds Eligible % Eligible Own

Funds

Solvency

Ratio

SCR 92,167

1 138,507 100% 138,507

2 0 0 0

3 0 0 0

Total 138,507 100% 138,507 150%

The Company’s eligible amount of Own Funds to cover the MCR as of December 31st 2016 is listed in the table below.

Solvency Overview (in €’000s)

Tier Own Funds Eligible % Eligible Own

Funds

Solvency

Ratio

MCR 23,042

1 138,507 100% 138,507

2 0 0 0

3 0 0 0

Total 138,507 100% 138,507 601%

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There are certain differences between the value of Own Funds under Solvency II and the value of Equity shown in the Company’s Financial Statements. These arise due to the difference in valuation of assets and liabilities described in Section D of this report. A reconciliation is shown in the table below.

€’000

Equity per Financial Statements 174,121

Difference in SII TPs - 13,916

Removal of Depreciation on Property 158

Solvency II Own Funds 160,363

None of the Company’s Own Funds are subject to transitional arrangements. The Company has no Ancillary Own Funds. There are no ring-fenced funds nor is there any restriction affecting the availability and transferability of Own Funds within the Company.

E.2 Solvency capital requirement and minimum capital requirement

The Company uses an off-the-shelf system, VEGA, provided by Milliman to calculate its SCR and MCR using the Standard Formula. The Company does not use any Undertaking Specific Parameters (USPs) nor does it use simplified calculations for any of the risk modules.

Capital Requirements 31 Dec 2016 €’000-

SCR 92,167

MCR 23,042

Solvency Capital Requirement

The Company’s SCR split by risk module as of December 31st 2016 is shown in the table below.

€’000

Heath NSLT underwriting risk 361

Non-Life underwriting risk 34,540

Market risk 42,870

Counterparty default risk 23,410

Undiversified Basic SCR 101,181

Diversification credit (26,070)

Basic SCR 75,112

Operational risk 17,055

Standard formula SCR 92,167

28%

35%

19%

18%

SCR Composition (post diversification)

Non-Life underwriting risk

Market risk

Counterparty default risk

Operational risk

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Solvency Capital Requirement

The Company calculates its linear MCR using the prescribed formula. This is then compared with the absolute floor of the MCR, the MCR cap and the MCR floor. Both the cap and floor are determined using the Standard Formula SCR.

Overall MCR calculation €’000

Linear MCR 15,261

SCR 92,167

MCR cap 41,475

MCR floor 23,042

Combined MCR 23,042

Absolute floor of the MCR 2,500

Minimum Capital Requirement 23,042

The inputs for the linear MCR are shown in the table below, prescribed factors are applied to these figures to calculate the linear MCR.

MCR inputs (€’000)

Net (of reinsurance/SPV)

best estimate and TP

calculated as a whole

Net (of reinsurance)

written premiums in

the last twelve months

Income protection insurance and proportional reinsurance. -

1,557

Fire and other damage to property insurance and proportional reinsurance.

7,547

6,364

General liability insurance and proportional reinsurance.

49,940

21,958

Credit and suretyship insurance and proportional reinsurance.

7,381

4,366

Assistance and proportional reinsurance.

304 632

Miscellaneous financial loss insurance and proportional reinsurance.

9,838 17,879

E.3 Use of duration-based equity risk sub-module in the calculation of Solvency Capital Requirement

The Company does not use the duration-based equity risk sub-module in the calculation of its SCR.

E.4 Difference between the standard formula and the internal model used

The Company does not have an Internal Model to calculate its SCR.

E.5 Non-compliance with the Minimum Capital Requirement and non-compliance with the Solvency Capital Requirement

The Company has been in compliance with the MCR and SCR throughout the reporting period.

E.6 Any other information

None noted.

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F. Appendix – QRTs

solvency and financial condition report · malpractice account. the company seeks to adopt clear...

Documents